Excuse me for posting the full article - if I had posted the URL readers would have had to fiddle around with obtaining a password. Note what Simons says about the erosion of Trend Following. Note also the time he says it took him to learn to trade.

NEW YORK (HedgeWorld.com)â€”Jim Simons, the legendary mathematician and hedge fund manager who runs Renaissance Technologies Corp., may use black boxes on his trading floors, but as a person he is open and forthcoming: a mixture of humility, common sense and pragmatism.
At the International Association of Financial Engineers annual conference, this year titled "From Quant to Riches," and held in New York on Monday [May 21], Mr. Simons gave a speech in which he offered self-effacing insights about himself and his investment style.

Mr. Simons is probably the most successful hedge fund manager of all time. His $26 billion hedge fund has yielded returns exceeding 30% for more than a decade. He also brought home $1.5 billion last year, according to Trader Magazine, tops among his peers in compensation. And yet, he remains modest and attributes a lot of his successful career to luck.

"There is no real substitute for common sense except for good luck, which is a perfect substitute for everything," Mr. Simons said at the conference. "I had luck as a mathematician. I became very famous but I had very little to do with it."

Mr. Simons' success may be the result of several factors. One is certainly the rare ability to be at the same time a top trader and a high-end mathematician. In some instances, Mr. Simons the mathematician almost appears to be a different person than Mr. Simons the trader. And yet, the man is all of that. Who would have thought, for instance that Mr. Simons viewed himself as a speculator? But he does. "Speculation comes in and destroys trends. I am a speculator. It accelerates the trend. It gets you closer to the truth faster," he said.

One interesting revelation was that the champion of statistical arbitrage and computer-generated trading started as a directional trader. The master of quantitative finance started with his business partner as a commodity trader. Both made wild bets and in 1974 the two launched their fund with $600,000. In seven months, they had grown in size by a factor of 10. Mr. Simons' partner "never made any money as a commodity trader after that for the rest of his life," said Mr. Simons.

In the 1970s, Mr. Simons made a lot of his fortune with sugar. In his speech, he said he bought sugar at 20 cents per pound. The commodity went up to 60 cents per pound in a short time.

Then came a time when the directional trader slowly moved toward models. But the evolution did not happen overnight. During that transition time, Mr. Simons hired a partner, Lenny Baum, to write models for him. Mr. Baum concentrated on writing currency models, and it worked out well. But after some time, Mr. Baum grew tired and bored of it, said Mr. Simons. At some point, Mr. Baum decided to buy the British pound. "The pound went through the roof. Lenny never looked at a model again," said Mr. Simons.

During the first two years after the two partners gave up modeling altogether, they multiplied their capital by a factor of 12.

Mr. Simons credited both luck and common sense in explaining his success. In an anecdote, he explained how he came to sell his gold during a gold rally. "My broker said his wife had sold his [gold] cuff. I told my broker to sell my gold position. He didn't want to but I told him: â€˜I'm the boss.' Gold was up the next day, but the following day, it was the end of the gold rally. I was lucky. But that was also common sense."

Two of Mr. Simons' other interesting personality traits, ones that are necessary to be a master trader, are his adaptability and flexibility.

Mr. Simons took his currency model and applied it to commodities. At the end of the 1980s, he switched styles. "We decided that systematic trading was best. Fundamental trading gave me ulcers."

Mr. Simons also needed traders. But he felt that he did not know how to pick a good trader. "Science, I understood. I decided to just focus on making models."

That's when the Medallion Fund started in 1988 with $25 million. It's worth noting that during these early years Mr. Simons did not completely settle for quantitative finance.

Mr. Simons, who does not suffer from an inflated ego, said that even at that time, he had a lot to learn. "It took us six years to learn how to trade stocks," he said. But the learning paid off. Five years after Medallion launched, the fund was closed to new investors. And by the end of 2002, Medallion had almost $7 billion under management. Judging that it was too much, Mr. Simons in 2005 returned all the money to investors.

This marked another milestone, at which point Mr. Simons again reinvented himself. "We understood the limitations of very high-speed trading techniques. We looked at other factors besides intraday fluctuations," he said. From high-frequency trading, Mr. Simons evolved to a system that focused on the long end of the frequency spectrum. In addition, his new systems integrated elements of fundamental analysis, such as balance sheets or income statements.

His new research began at the start of 2004 and in July of 2005, Renaissance launched its Renaissance Institutional Equities Fund (RIEF).

The launch was newsworthy due to its phenomenal size. "We targeted $100 billion. It attracted a great deal of attention, which I intended to do," Mr. Simons said. "The $100 billion was a template for research. This fund can only charge low fees. In order to make it worthwhile, you have to make it very big, otherwise, it doesn't make sense."

Renaissance has charged incentive fees of up to 44% for some of its products in the past. RIEF charges a 1% management fee and 10% for performance with high water mark, according to a marketing document obtained by HedgeWorld.

So far, the fund is growing at a steady pace and has reached $26 billion.

Mr. Simons said that "trend-following is not such a good model. It's simply eroded." Things change and being able to adjust is what made Mr. Simons so successful. "Statistic predictor signals erode over the next several years; it can be five years or 10 years. You have to keep coming up with new things because the market is against us. If you don't keep getting better, you're going to do worse." Mr. Simons said that his models change weekly.

Mr. Simons talked about Renaissance's little-known fund of funds, arguing as a good contrarian that "past performance is to some degree indicative of what it's going to be in the future." He then rephrased his statement to make it acceptable to the Securities and Exchange Commission: "Past performance is certainly not a guarantee, but somewhat, it's likely correlated," he said.

Mr. Simons said that Renaissance comprises 300 people. Here again, the myth of secrecy collapsed. "Our atmosphere is 100% open," he said. "It's the best way to do science. There's a weekly meeting with everybody."

As is widely known, Mr. Simons works with scientists, not traders. "We use a lot of mathematicians, physicists, astronomers, computer scientists. We haven't hired out of Wall Street at all."

In 2004, Mr. Simons, along with a group of mathematicians and business people, founded Math for America to improve math education in U.S. public schools. The organization is behind a new bill called America Competesâ€”a bill to expand basic research and development and promote math and science educationâ€”which Mr. Simons said he hopes will get passed.

So what's in Mr. Simons' black box? He won't say of course. But if there is a secret, it's a pretty simple one "It's 100% automated. It's as automated as it can be. The computer does its thing. It generates its trade, and the trade gets executed. No one sticks its head to the door, and says: â€˜Jeez! You should buy IBM!' We couldn't model that."

It seems to me Jim Simmons is very good at playing the Media to his advantage. I think the image/reputation he has built up is almost as impressive as the returns he continues to generate.

While I, in my limited capacity, see trend following returns eroding over time, I believe trend following is a cyclical game. I wonder if Simmons is encouraging people, partially at least, to look away from trend following.

Who knows.

Weekly model changes? Or something like weekly portfolio allocation rebalances? Analogue position building functions? The myth and room for interpretation are almost certainly more exciting than the fact.

Back to Trend Following in a broader sense, if/when Merrill Lynch pull their money from JWH it'll be interesting to see the effects...

Angelo wrote:For me, the odd part was about his models changing weekly.

Markets do change, but on a weekly basis?

He could be referring to adaptive systems, rolling optimizations, etc. If your entry criteria has the term ATR in it, then isn't your system changing by the week? A simple example, but still.

Also, I believe Renaissance does a lot of high-frequency stuff. If your average holding period is 2 seconds, one week could be an entire bear market (though I suspect microstructure techniques are less susceptible to different types of markets).

My guess is that since he's basically marketing his fund, he wants people to know that he's willing and able to change the systems in use. He's probably trying to snatch up a lot of clients from other hedge funds that haven't done so well (due to many trend following systems underperformance).

Instead of making material changes, one could instead make essentially meaningless changes on a frequent basis.

* if parameters for one variable between 25 and 35 are robust, use a different one each month

* do the same for other variables or filters that have robust ranges of parameter

* if the model relies on 6-8 strongly predictive filters, with filters number 9-15 moderately useful to "at least not harmful," then spend a few weeks with different filters added or subtracted.

Why?

It keeps others from deconstructing your real system (which is 6-8 rules and some optimized parameters), and

It's great marketing.

----Another possibility,

He's doing a huge walk-forward test, and every week he adds that week's data to the machine, maybe subtracts the earliest week, does another backtest, and reoptimizes the factor selection. Just because it "changes the model" doesn't mean it "changes the model" if you know what I mean.

I thought this little piece from a recent FT article shows that Mr. Simons may not be as bearish on trendfollowing as the earlier article implies.

One recent example is the launch of a medium-term trend following fund by Renaissance Technologies, the Long Island, New York-based hedge fund that is one of the worldâ€™s most respected. It has raised $5bn in five months, and has more PhDs than any other hedge fund â€“ plus Jim Simons, a maths professor, as its founder.

The full article (which is an excellent commentary on the current state of trendfollowing strategies) is at the following link (registration required.)

Leading indicators can be used for all markets. For example; when a commodity index breaks out to the upside you put your long/neutral commodity system to work, when it breaks out to the downside you put your short/neutral commodity system to work, when a stock index breaks out to the upside you put your long/neutral stock program to work and vice versa. A leading indicator must be the basis for which system you allocate money to. Yes you will have lagging months sometimes and also false breakouts but in general following this strategy pays off. There is no 1 system solution. You must be flexible, versatile, and put some discretion in it to make it work long term. You don't need to be a mathemacian to understand this.

Well said â€˜adamantâ€™
Your comments certainly provide food for thought about whether any edge that is currently being enjoyed will prove to be fleeting one or one with a long life or even subject to long up/down cycles. Does anyone really know? Can this be predicted or modelled?
How does one know when a system has â€˜brokenâ€™ and the â€œPrincipal of Ever-changing Cyclesâ€

rhc wrote:I will, however, add that according to my testing, pure Trendfollowing systems (i.e. moving averages/bands, higher high breakouts etc) have stood the test of time . . . . so far!!
Will they continue to do so? Again, who can know
Any comments?

The markets are unfathomable, just like the human emotions. So we may resonably expect that sometimes they will trend, sometimes they won't.

Even though pure trend following systems have a sound premise behind them, the task of optimization, being a very imprecise method with little predictive value, can introduce a lot of flaws in the process.

I mean, the optimal parameters for your trend following system in the next 10 or 20 years might be a set of parameters which never occurred in the past.

So, the real issue is: how to improve the "predictive" results of your backtesting, or at least, make them more "correlated" to future results? Or how to handle market changes that ultimately determine which parameters will work best for a given period? Coming up with an "adaptive system" is at all possible?

Or instead the trader will have to be flexible enough to cope with changes? How? Or instead, as even a broken clock is right twice a day, the trader would better stick with his "broken clock"?

With regard to the mathematicians, it looks like they quickly learn the laws of marketing as well.

Their task as successful hedge fund managers is to make people believe they have something special, the key to the secret misteries nobody else has.

So, I believe that their interviews are just bullshit, directed to investors.

Willian Eckhardt told his audience in a lecture that he was "judiciously avoiding breakouts". Compare such statement with this excerpt (from Market Wizards if I am not mistaken):

" . . . if you make a bad trade and you have money management, you are really not in much trouble. However, if you miss a good trade there is nowhere to turn. If you miss good trades with any regularity you're finished. For example, let's say the market moves rapidly through your buying zone and you miss it, you miss your buy signal and instead wait for a retracement to maybe buy cheaper. But, the market just keeps going higher and higher and never retraces. Now what do you do? There's a great temptation to reason that now it's too high to buy. If you buy it now you'll have an initiation price that's too high? No, the initiation price simply won't have the kind of significance you suppose it will have after the trade is made. You can't miss these trades. Trading systems force discipline to make sure these trades are not missed."

alp wrote:With regard to the mathematicians, it looks like they quickly learn the laws of marketing as well.

Their task as successful hedge fund managers is to make people believe they have something special, the key to the secret misteries nobody else has.

So, I believe that their interviews are just bullshit, directed to investors.

Willian Eckhardt told his audience in a lecture that he was "judiciously avoiding breakouts". Compare such statement with this excerpt (from Market Wizards if I am not mistaken):

" . . . if you make a bad trade and you have money management, you are really not in much trouble. However, if you miss a good trade there is nowhere to turn. If you miss good trades with any regularity you're finished. For example, let's say the market moves rapidly through your buying zone and you miss it, you miss your buy signal and instead wait for a retracement to maybe buy cheaper. But, the market just keeps going higher and higher and never retraces. Now what do you do? There's a great temptation to reason that now it's too high to buy. If you buy it now you'll have an initiation price that's too high? No, the initiation price simply won't have the kind of significance you suppose it will have after the trade is made. You can't miss these trades. Trading systems force discipline to make sure these trades are not missed."

+1!

Actually more like +100!

I happen to have first hand knowledge (without revealing my mysterious sources) that this IS EXACTLY what is taking place.

If you are a LTTF then you are prone to feelings of inadequacy, especially in light of returns like RenTec has produced

I personally have these same feelings from time to time. However when I delve into my testing and take a step back I am reassured that I have done my homework and am comfortable with the risk level I have chosen and the returns I shoot for. That does not stop me from trying to get better. When testing new things, the ratio of what works to what does not is pretty small. A company like RenTec swings the bat a lot more due to its internal structure and number of brains. They are obviously going to find some things that work better. Does that mean they have a magical black box? No I do not believe they do because I do not believe in magical black boxes. They work hard, find plenty of trends and correspondingly make money. Maybe they want to call themselves trend hunters instead of trend followers, that is their prerogative.

In terms of what Simons is trying to achieve by talking to the media, he is just playing the game. Being loved by the financial media has a positive expected value for RenTec and its clients. Be nice, tell a story and go back to work. It is most important to note that his comments specifically do not say that trend following does not make money. He says it has eroded. I interpret this as, the "risk-adjusted" returns of pure trend following have gone down (which I believe they have) but you can still make money. I believe that large institutions have different risk tolerance than me or my clients and exposing $100 billion to even a 20% drawdown would go down like a lead balloon.